Financial services companies frequently employ actuaries who, among other tasks, develop models that may be used to predict future market conditions and how their companies' product may fare in the future market conditions. Based on a model developed by their actuaries, a financial services company can determine what products to offer, how products should be priced, and also determine steps that may be taken to hedge risks related to existing products.
Actuarial modeling is used for many financial products, including products such as annuity contracts. An annuity contract may provide for an initial premium to be paid by a contract owner to an insurance company. The annuity contract may describe an accumulation phase, during which the annuity has an account value. In a fixed annuity contract, the insurance company may credit a market rate, generally determined on a periodic basis, to the account value. The account value increases during the accumulation phase in accordance with this periodically determined interest rate. In a variable annuity contract, during the accumulation phase, the contract owner has the right to allocate funds making up the account value to one or more subaccounts. Each subaccount may have a rate of return based on the rate of return of an investment fund selected by the contract owner. The available investment funds may include a wide range of available mutual funds, such as stock mutual funds with various investment guidelines, fixed income mutual funds, exchange traded funds, and other types of funds. The portion of the account value allocated to each fund varies along with the performance of the fund, so that the account value may both increase and decrease. Thus, the account value of the contract may be affected (both positively and negatively) by market conditions.
During the accumulation phase, the contract owner may elect to annuitize the value of the account. This converts the value of the account to an annuity that pays a periodic amount, generally for the lifetime of the contract owner. When the account is annuitized, the accumulation phase is concluded, and the account no longer has an account value. Many annuity contracts provide that, if the contract owner dies during the accumulation phase, the value of the account is paid to a beneficiary as a death benefit. Further, some annuity contracts may be associated with other benefits, such as a guaranteed minimum withdrawal benefit (GMWB), a guaranteed minimum income benefit (GMIB), or other type of benefit. According to a GMWB, the contract owner is permitted to withdraw the entire value of the premium on a periodic basis, without annuitizing the annuity, regardless of fluctuations in account value. For example, if a contract owner initially paid a premium of $200,000, but due to market conditions, their account value is only worth $150,000, the contract owner may still withdraw a percentage of the initial premium value on a periodic basis (e.g., once per year) until the entire value of the initial premium (in this example, $200,000) is recovered. According to a GMIB, the insurance company that is party to the annuity guarantees a minimum level of annuity payments, regardless of fluctuations in the account value.
Currently, actuaries frequently use spreadsheet applications (such as Microsoft Excel) to develop their models for annuity contracts and other products. These spreadsheet applications are user-friendly and intuitive, and can be used effectively by actuaries to develop models. However, these models can be very large in scope, and include very large amounts of data. Additionally, spreadsheet programs typically are general-purpose programs, and not optimized to run simulations based on models such as these. Therefore, simulations of these models as defined in spreadsheet programs can require prohibitively long periods of time (potentially hours or days) to execute. One current approach to address these issues includes employing software developers to program optimized, specific-purpose programs based on spreadsheet models defined by actuaries. While this approach results in faster models in some instances, it introduces a number of other issues. For example, writing the specific-purpose programs can be challenging, because domain-specific knowledge on the part of the developers is required. Further, errors can be introduced into the specific-purpose programs by developers during development, such that the specific-purpose programs do not accurately reflect the models defined by the actuaries. Additionally, the process of developing specific-purpose programs to reflect complex models can be very time-consuming. Therefore, new technologies that address the above-mentioned shortcomings of the current approaches to modeling financial products would be advantageous.